4 factors when tapping a 529 plan in retirement

If you've dreamed about going back to school, but haven't had the time, don't give up yet. By opening a 529 plan while you're still working, you can fund at least part of your educational expenses when you retire and have the time and energy to study.

There are lots of educational options for retirees and many of them qualify for 529 plan funding. Whether you want to get a degree or just take a few graduate or undergraduate classes, you can use 529 plan funds on classes at any institute of higher education that qualifies for federal student loans.

Joe Hurley, founder of Savingforcollege.com, has established 529 plans for himself and his wife with a view towards taking classes once they retire. "529s can be used tax-free for attendance at eligible institutions," he says. "You don't have to go full-time or even half-time. You can take a single class at a time at your local community college."

If you're thinking about going back to school when you retire and are interested in funding a 529 plan, here are some factors to consider:

Opening and funding a 529 plan

You can open up a 529 plan for as little as $25 to $50 for most plans. Every state and the District of Columbia have at least one plan. Look at your state's plan first, as you might get a tax deduction for investing in your own state's plan.

Obviously, the earlier you start saving, the more you can sock away for your educational needs. If you're serious about going back to school, opening a 529 plan is a commitment toward achieving that goal, Hurley says.

But when thinking about opening a 529 plan and funding it, don't skip on filling your retirement coffers, says Craig Silverman, a financial adviser with AXA Advisors in Melville, NY. "It's a challenge these days for many to have enough money to save for retirement, let alone saving in a 529 plan for themselves," he says.

Take advantage of tax savings

There are potentially two ways to save on taxes by using a 529 plan for educational expenses in retirement. The first way to save is that many states offer tax deductions or credits for contributions to 529 plans. Find out more about each state's plans here.

Even if you haven't saved any money in advance of retirement, you can open a 529 plan right before you start school. Deposit what you plan to pay in tuition, books or other school expenses in that account and take it out later to fund your classes. Doing so will give you a tax deduction, Silverman says.

Secondly, any earnings you receive on money in your 529 plan are tax-free when used for qualified educational expenses. So, if you save for a number of years and have some good returns, you don't have to pay taxes on those returns and have more to spend on your education, Hurley says.

Spending 529 plan funds

You're retired and ready to go back to school. To find out if a college, technical school or other educational institute is qualified or to find a qualified school in your state, check this story.

For example, in Pennsylvania, there are hundreds of eligible institutions. They include The Art Institute of Pittsburgh, where you can take cooking, photography and art classes, and Beaver County Community College, where you can study for a teacher's certificate in yoga or take liberal arts and business classes.

You can spend 529 plan funds on tuition, books and fees. You can even pay for room and board if you're attending college at least half-time, based on the normal full-time workload of that particular course of study as determined by the school but not less than federal standards, says Hurley.

Managing leftover money

If you've saved money for yourself to go back to school and you don't end up using it, or you don't end up spending all of it, there are options. "You can transfer the money to one of your own kids, or to your spouse, a niece, nephew or other relative, without penalty and that person can use the money for their own college expenses," says Silverman.

Transferring all or part of the money from a 529 plan is pretty simple. You can get a form from your 529 plan and have the money transferred into a relative's 529 account.